Recovery? The Middle Class Is Still Waiting


Washington Post columnist Neil Irwin stopped by to discuss his book, The Alchemists: Three Central Bankers and a World on Fire. It's a great read on the history of central banks, including how they responded to the financial crisis and the challenges they face in the future.

Economic cycles can be long, especially when everyone is eager for improvement. Neil considers the outlook for middle-income Americans as the economy works its way slowly back from the brink. The full version of the interview can be found here. A full transcript follows the video.

Morgan Housel: During the last three years, I've interviewed dozens of different economists, and I always ask them the same question. I say, "When do you think the average American will be able to look in the mirror and say, 'I'm doing better than ever'?"

Literally, the most common response I've gotten is laughter. Let me turn that to you. When do you think the average American will be doing better than ever?

Neil Irwin: You know, it's funny. If by "average" you mean median -- the person in the middle of the income distribution -- it hasn't just been a bad five years for that person, that family. It's been a rough 20 years.

For median income, we're not where we were even 15 years ago, in the late '90s. There have been a lot of forces really making life difficult. These are families that don't have a lot of stock market wealth. They have all kinds of expenses that have been rising -- gas prices, food prices, things like that -- and their incomes have been stagnant. That's not a good situation to be in.

This recovery so far, it's been a nice, steady recovery, but it hasn't affected real wages for the working class very much. It has affected stock prices, it has affected things that ... even home prices. If you're a middle class citizen, that helps you, but if you're somebody that has a $2 million house, that helps you a lot more than if you have a $100,000 house.

Anyway, that's a long way of saying, this has been a tough 15 years, and we're not there. It's going to take considerably higher growth. The last time we saw real growth in living standards and wages for the middle-income Americans was the late '90s, when we had that extraordinary growth, 4-5%. We're going to need a few years of that before we're back to that point.

Morgan: These things move in long cycles, right? The early 1900s was very bad for consumers. The middle 1900s -- 1950s and '60s -- was a pretty great time for them. The last 20 years, as you said, has been pretty awful.

To me, it seems like these things move in broad cycles. Given that the last 20 years have been so awful, is it fair to say that we're closer to a new upcycle?

Neil: I am fundamentally optimistic in a way that I know a lot of analysts, a lot of commentators aren't.

People talk about structural problems in the economy, and they absolutely exist. What do we do with people who are not well educated in a 21st century workforce, where you really need advanced education to earn a good income?

At the same time, I think there has been a lot of meaningful structural change in the economy. I think this is a more resilient U.S. economy now than I would have said 5 years, 10 years, 15 years ago. It's not based on dot-com wealth and made-up companies. It's not based on a housing bubble that's inevitably going to collapse.

We're seeing gains, slower than we'd like, but we are seeing economic gains that are rooted in strength in manufacturing and service industries, in companies beyond one credit-fueled bubble. I hope that can continue. I hope that that can be the source of growing wages and a higher standard of living, but I acknowledge it's not there yet.

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